4 Pros and
4 Cons
Debt consolidation is one of the most important financial
decisions some people will face in their lives. When
debt begins to overwhelm your life, bills seemingly
coming at you from all angles, the idea of simplifying
your debt into one manageable bundle seems enticing.
The most common form of debt consolidation involves
applying for a debt consolidation loan. A debt consolidation
loan condenses all of your monthly payments into one
bill. Debt consolidation should not be confused with
bankruptcy, in which all debts are cancelled and your
credit rating plummets. Debt consolidation is more akin
to refinancing, in which old loans are reviewed and
renewed, only under more favorable terms.
Sounds rosy enough, but before you decide to consolidate
your debts, take the time to weigh carefully some of
the pros and cons.
Pros
1) Simplified money management. Rather than paying
a dozen or more bills each month, debt consolidation
allows you to make a single payment that encompasses
all of your debts. Clearly, this is a big pro in favor
of debt consolidation. Who doesn’t know the feeling
of anxiety as bills begin to pour in? There are credit
card bills, utility bills, medical bills, car loans,
student loans, gas cards, and any combination of late
or overdraft fees that you may have accumulated. It’s
enough to make anyone’s head spin! The idea of
having all these debts condensed into one simple monthly
bill is very attractive indeed.
2) Lower monthly payments. Obviously, of you must only
pay one bill a month, your monthly payment will automatically
be lower than it was before. Thus, you will be granted
substantial relief in your monthly spending.
3) Reduced Interest Rate. A debt consolidation loan
will generally come with a lower interest rate than
you were paying on your credit cards.
4) Relief from creditors. The peace gained from not
having to deal with creditors is a welcome refuge for
anyone who has experienced the anxiety of being sought
by creditors.
Cons
1) Your debt—all of it—still exists. Some
people get the idea that debt is somehow lessened simply
by the act of consolidating it. This is simply not true.
By consolidating your debt, you are merely adding it
all together and condensing it into one large loan.
2) You will probably take longer to pay off debts.
Because debt consolidation usually minimizes your required
monthly payment, you can expect it will take longer
to pay off your debts entirely.
3) You will probably pay more in the long run. Again,
those comfortable monthly payments mean that your debt
is being stretched over time. Expect to pay more over
time, as finance charges on interest rates add up quickly.
4) Debt consolidation may encourage a false sense of
security. Having your debt consolidated may create the
sense that your debt is under control. This false sense
of security is dangerous because it could lead you to
overextending yourself again. Some argue that debt consolidation
treats the symptoms of the problem.
After weighing carefully the pros and cons of consolidation,
if you do decide to apply for a debt consolidation loan,
you should know that the type of consolidation loan
you qualify for will depend on various factors. Some
of the factors lending institutions consider in deciding
whether to approve you for a debt consolidation loan
include whether you have an adequate credit rating,
if you hold some sort of equity, and whether you have
a consistent income source.
Shop around to find a lender who will offer you the
best consolidation loan for your specific situation.
Loans vary widely in length, interest rate, amount loaned,
and the type of interest rate (fixed or adjustable).
The interest paid on these loans is usually secured
by equity on a property, such as your home.
Another form of debt consolidation involves the use
of credit counseling services. Credit counseling services
help individuals regain control over their finances
by helping them reduce their debt in various ways. These
services often serve as an intermediary between you
and the company you owe money to. Credit counseling
services can intervene on your behalf, often convincing
companies to reduce interest rates and cancel fees.
Credit counseling services can also help teach you important
money management skills.
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